Australia | 11:12 AM
By Scott Solomon, Co-Portfolio Manager of the T. Rowe Price Dynamic Global Bond Strategy
A lot can change seemingly overnight in the world of central banks. What we’ve seen transpire over the past few weeks certainly speaks to this. We are now unlikely to see the Reserve Bank of Australia (RBA) hike, and a cut is even possible by year-end. Look ahead, we think the second half of 2024 is poised to have a pivotal impact on Australia for the rest of the decade.
Australia continues to struggle with wealth inequality, which has manifested itself through deteriorating housing affordability. There exists a viewpoint suggesting immigration as a solution yet considering the origins of much of this immigration being students, such a strategy only perpetuates inequality through capital inflows.
While overall GDP growth shows improvement, per capita growth is negative. For example, under normal conditions a strong housing market translates to strong lending and construction markets. However, the unique nature of this cycle has not seen this transpire.
Firstly, mortgage growth has been non-existent with cash buyers comprising a significant 25%, a substantial figure. Secondly, efforts to boost housing density face complications beyond mere opposition from local resident councils due to the distinctive nature of the cycle. Even if developments were easier to facilitate, challenges such as tightness in construction labour and sheer level of government spending make channeling resources into private apartment construction nearly impossible.
On the other hand, there simply aren’t significant imbalances in the economy. The rise in asset values means impairments for lenders (such as banks) continue to remain low.
This all translates to a very difficult job for the RBA as it continues to try and thread the needle of controlling for inflation but also trying to limit excessive pressure on the consumer and households, which are undoubtedly weak. And these impacts are negatively skewed towards younger Australians who on balance own homes at a much lower rate than their parents.
Luckily, inflationary pressure does appear to be waning and we expect inflation will fall within the desired range about a quarter before current RBA estimates. The RBA is unlikely to hike, and now a cut is even possible before the year is over. While we don’t expect Governor Michele Bullock to commit to cuts, it’s unlikely she does much to push back against them. The rest of her global central bank counterparts are dovish peer pressure is tough to avoid.
Globally, growth has slowed, and central banks are at the early stages of a cutting cycle. We expect less cuts than what is currently priced as even slight rate adjustments may quickly translate to growth. We are not in a financial crisis: growth has been driven by government spending instead of increases in credit. With steeper yield curves, banks can get back to a more normal environment of borrowing short term and lending long term.
The concern is that this is only temporary. The problems of wealth inequality in Australia appear structural and are not going away without some sort of changes from government policy. It’s clear the RBA has recognized this and has noted several times they can’t tackle it alone.
With the Federal Election looming next May, voters will face a multitude of decisions. The unfolding events in the remainder of the year will undoubtedly shape the future trajectory of Australia and set the tone for the decade ahead.
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